Solazyme's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 7.12 | About: TerraVia Holdings, (TVIA)

Solazyme, Inc. (SZYM) Q2 2012 Earnings Call August 7, 2012 4:30 PM ET


James Barber – IR

Jonathan Wolfson – CEO

Tyler Painter – CFO


Brian Lee – Goldman Sachs

Ben Kallo – Robert W. Baird & Co., Inc.

Ed Westlake – Credit Suisse

Jim Fung – Jefferies & Co.

Smitti Srethapramote – Morgan Stanley

Noah Kaye – ThinkEquity

Mahavir Sanghavi – UBS

Sanjay Shrestha – Lazard Capital

John Quealy – Canaccord Genuity

Weston Twigg – Pacific Crest

Pavel Molchanov – Raymond James

Michael Klein – Sidoti & Company


Good day, ladies and gentlemen and welcome to the Solazyme Incorporated fiscal quarter two 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session with instructions to follow at that time.

Should anyone require operator assistance on today’s conference, you may press star and then zero on your touchtone telephone. As a reminder this conference call is being recorded. I would now like to turn the call over to your host for today, Mr. James Barber [ph], Investor Relations.

James Barber

Good afternoon and thank you for joining us on today’s conference call to discuss Solazyme’s fiscal second quarter 2012 results. With me on today’s call are Jonathan Wolfson, Solazyme’s Chief Executive Officer and Tyler Painter, Chief Financial Officer.

This call is being broadcast live over the web and we have prepared a PowerPoint presentation to accompany this call. The release in presentation can be accessed at the Investor Relations portion of our website,

I’d like to direct you to slide 2. It says among other things that some of the comments constitute forward-looking statements that reflect the management’s current views and estimates of future events and economic circumstances, industry conditions, company performance and financial results.

Statements are based on many assumptions and factors including availability and prices of raw materials and equipment, market conditions, operating efficiencies, access to capital and actions of government. Any changes in such assumption for factors can produce significantly different results.

To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events. Solazyme has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you to review these factors.

Also please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in today’s release.

With that, I’ll now turn the call over to Jonathan.

Jonathan Wolfson

Thanks, James and thanks everybody for participating on today’s call. The second quarter of 2012 was another very strong quarter for Solazyme. We hit key milestones toward building out our commercial manufacturing capacity including breaking ground at the Solazyme Bunge oils facility in Brazil and successfully commissioning our integrated bio refinery in Peoria Illinois both on schedule.

And within our Solazyme Roquette Nutritionals JV, construction on the Phase II 5,000 metric ton facility is progressing and we continue to expect the plant to be operational in the second quarter of 2013.

We’re actively advancing our downstream commercialization in each of our target markets. In our first to market opportunity, skin and personal care, sales of our Algenist brand in the first half of 2012 surpassed full year sales for 2011.

In nutrition our Solazyme Roquette Nutritionals JV had a big win when we received an FDA no questions notification corresponding to the generally recognized as safe filing with the FDA for use of an algal oil and foods [ph].

Outside the JV, we’re sampling new tailored oils to some of the food companies in the world. In chemicals, we’re producing new and breakthrough tailored oil profiles that will disrupt existing markets and define new ones.

In fuels, the US Navy demonstrated the Green Strike Group at RIMPAC 2012 and the EPA granted registration for our SoladieselRD fuel. Diving a bit deeper, our Solazyme Bunge renewable oils JV is opt to a great start.

In June, we broke ground on our first 100,000 metric ton commercial facility located at Bunge’s flagship sugar cane mill in Moema, Brazil. We recently commenced civil works at the site and we remain unscheduled for operations in the fourth quarter of 2013.

We also announced the formation of the JV management team including the employment of Hildo Henz as the general manager. Hildo is a seasoned executive who brings proven experience. He served as a CEO of a major refining joint venture between Petrobras and Repsol where he was responsible for over $1.3 billion on capital expansion projects and while at Branko, a major sugar and ethanol producer in Brazil, he managed green field projects in excess of $500 million.

Here in the US, we’re pleased with the progress at our manufacturing facility in Peoria, Illinois where we commenced operations for an integrated bio refinery with the DOE on schedule during the quarter.

This facility now enables us to produce substantial quantities of algal oil for market development at a single sight, providing for sampling and market seeding for a multitude of partners and potential customers in an integrated commercial scale facility.

During the quarter, we expanded the oil produced in our large fermentation tanks in Peoria by scaling up production of one of our important high oleic oils enabling our commercial team to supply large scale samples to several key target customers. And we’ve seen an increasing volume of incoming customer interest for our oils in a variety of markets.

Moving to our commercial activities, Algenist continues to see strong demand in stores and on QVC. For the first half of this year, sales of Algenist exceeded full year 2011 sales. We also introduced two new products this quarter, the Ultra Lightweight UV Defense Fluid SPF 50 and the Targeted Deep Wrinkle Minimizer.

Buzz for the brand is building and we’re receiving excellent coverage in major beauty and lifestyle publications.

On the nutrition side, our Solayzme Roquette Nutritionals JV is making progress in a number of areas. Construction on the Phase II 5,000 metric ton facility in Lestrem, France is moving forward smoothly and we expect the plant to be operational in Q2 of 2013.

We’ve recently received an FDA no questions notification responding to the generally recognized safe filing with the FDA for the use of algal oil in foods. This positive FDA notification for algal oil demonstrates our ability to successfully work with the FDA to meet food regulatory requirements.

The notification builds upon a key regulatory opinion we received last year in the European Union that Solayzme Roquette Nutritionals Whole Algalin Flour should be classified as not novel allowing it mediate sale into food products.

These milestones represent important steps in developing markets worldwide for our nutritional products. We’re seeing strong interest from nutritional customers. Last quarter, we announced the introduction of a new high protein product. This product which we introduced on the call as Altein will be marketed under the Almagine HP brand and is a non-allergenic vegetarian protein powder which we believe fills a significant void in a growing $10 billion plus protein market. Large global food companies are now testing this product in new package food formulations.

Moving on to the fuels business, two weeks ago at the rim of the Pacific, RIMPAC 2012, the world’s largest international maritime exercise, the US Navy demonstrated the Great Green Fleet a carrier strike group fueled by alternative sources of energy.

The biofuel’s blends used by the ships and aircraft of the USS Nimitz Strike Group dubbed the Green Strike Group were mixtures of 50% biofuel made from algae and used cooking oil and 50% petroleum based marine diesel or aviation fuel.

Solazyme was the sole supplier of the algae based portion of the biofuel used in the exercise and Salodiesel is the only renewable fuel that has participated in every stage of the Navy’s testing and certification program for drop-in marine diesel.

On July 17th, 2012, the US Naval Ship, Henry J. Kaiser delivered 2.6 million liters of renewable marine diesel fuel HRD-76 to three ships in the USS Nimitz Strike Group and 750,000 liters of renewable aviation fuel HRJ-5 onto the Nimitz for the Carrier Air Wing 11.

The picture here from that day shows the Kaiser delivering the advanced biofuel to the USS Princeton with the rest of the Green Strike Group in the background. Although the US Navy has directly stated that the Great Green Fleet demonstration at RIMPAC was a success, the current US fiscal and political climate does not appear favorable for additional near-term DOD and Navy biofuel programs. And while our business is far from being dependent on the Department of Defense, we remain confident in the long-term prospects for our relationship with the Navy particularly given their state of national and energy security objectives.

We’re very proud of what we’ve accomplished so far and look forward to helping the Navy realize its goal to obtain 50% of its energy from alternative sources by 2020.

Separately in another fuel development last week, we announced that our fuel SoladieselRD is now registered by the US Environmental Protection Agency. This registration is required prior to selling our fuel for commercial purposes and is another key milestone in Solazyme’s mission to commercialize drop-in replacement fuels.

To our knowledge SoladieselRD is the first 100% microbially based fuel in history to receive an EPA fuel registration for use as a neat or unblended product. Meaning it’s completely drop-in compatible and does not require blending of any sort.

On the last quarter’s call, we profiled an example of a first of its kind oil created by Solazyme that’s made possible by our breakthrough technology platform. A triglyceride oil with the highest concentrations of oleic acid available combined with the elimination of polyunsaturates.

This optimal combination has never been available despite large investments by ag biotech companies. We continue to exhaustively characterize the properties of this oil with our partners and potential customers and I’d like to share some of the most recent data.

Based on Oil Stability Index, OSI tests performed on the oil, data confirms that it has by far the highest oxidative stability of any high oleic oil available. As background OSI is a standardized widely accepted and reported indication of the stability of an oil.

This slide compares the results of our high stability, high oleic oil against the previously best-in-class oil, high oleic sunflower oil. In practice triglyceride oils are routinely combined with antioxidant additives to enhance their shelf life and then both the absence and presence of supplementation with antioxidants, our high stability high oleic algal oil significantly outperforms the high oleic sunflower oil.

Without any oxidant supplementation, Solazyme’s oil is three times better than the sunflower oil. And with a natural standard antioxidant package, it shows more than fourfold improvement compared to the high oleic sunflower oil with the same antioxidant package.

This is unprecedented stability for high oleic oil and when combined with it fluidity at low temperatures should allow this oil to perform competitively against synthetic alternatives which are expensive in a variety of lubricant and functional fluid applications while bringing the added superior benefits of high lubricity, low VOCs, renewability and biodegradability.

This is a market first for triglyceride oil. In food applications, this oil offers opportunities for products with enhanced shelf life and extended fry life in food processing operations. In addition, one of the most exciting opportunities for this oil is its potential to help eliminate the use of oils containing trans fats from the global food supply.

Never before is liquid oil been created that gives the oxidative stability of partially hydrogenated vegetable oils yet without the trans fat.

Although we won’t do this every quarter, I’d like to take a little time now to give you a look into another valuable oil we’re developing with our expanding tailored oil platform. Each of these unique oils reflects the value of our technology and we expect to make a meaningful impact in key markets with our unique oil tailoring abilities.

Myristic acid, a fatty acid with 14 carbons and no double bonds is a valuable specialty chemical ingredient particularly in personal care markets. Coconut oil and Palm Kernel oil are the dominant sources of myristic acid today. However, they each contain relatively minor concentrations.

As a result there’s a limited availability of the pure-cut myristic acid even as demand continues to grow. While fatty acid prices are typically volatile, in 2012, the average selling price for pure-cut myristic acid has been over $4,200 per metric ton.

Based on internal estimates and discussions with partners, we believe the global market for pure-cut C14 to be approximately $600 million annually. Solazyme’s unique tailoring capability has already enabled us to create an oil with over 30% myristic acid which is two times better than what can be found in Palm Kernel or coconut oils and we’re well on our way to creating an oil with over 50% myristic acid, a three to five fold improvement over existing oils.

This is important because the value of this oil is directly link to the quantity myristic acid trend. Not only will this enable us to sell this novel oil into the [inaudible] chemical industry at premium prices but a new algal derive source with a reliable supply will open up new markets for our myristic oils. For example, allowing cosmetic manufacturers to formulate with the product without concern for supply volatility.

We’re protecting our technology platform as we continue to aggressively expand our intellectual property portfolio. We filed hundreds of patent applications in the US and internationally and are pleased to note that we’ve been issued three new US patents since early March.

The fantastic breadth of the technology platform is becoming increasingly evident as we rapidly uncover valuable opportunities, and we see this process continuing to unfold for many years to come.

We’re learning from everything we do and are continually increasing our ability to drive the platform forward in new and sometimes unexpected directions. It’s my firm belief that we’re only in the early stages of unlocking the potential of our platform and we’re creating enormous long-term value every day.

With that I’ll now turn the call over to Tyler to review the financials.

Tyler Painter

Thanks Jonathan, and thank you all for joining our call today. I’ll provide a brief recap of our second quarter and year-to-date financial performance. And then talk about the remainder of the year, an important milestone to look for in coming quarters.

All numbers I will be discussing are non-GAAP and exclude non-cash stock bases compensation expense and unrealized gains associated with the vesting of warrants granted to Bunge. These numbers are reconciled in our press release issued today.

Q2 was another strong quarter for Solazyme. We continue to deliver on key commercial milestones while managing our expenses closely. Revenue was $13.5 million compared to $7.4 million in Q2 of 2011. This represented 83% growth year-on-year. Product revenue of $4.1 million was more than triple that of second quarter last year as Algenist growth continued to exceed our expectations.

Revenue from funded research programs was $9.4 million versus $6.1 million last year, driven primarily by programs with the Department of Energy and with the Department of Defense as well as industry partners including Bunge, Chevron, Dow and Unilever.

Our total operating expenses worth $30.5 million for the quarter, compared with $14.1 million in Q2, 2011. R&D expenses were $17.4 million compared to $9 million last year. The increased in R&D expenses were driven primarily by a combination of head count growth year-on-year as well as one-time expenses for government programs with the DOE and the DOD.

SG&A expenses came in at $10.9 million compared to $7.9 million last year. Year-to-date, revenue was $27.1 million compared to $15.1 million in the first half of 2011 up 79%. Our operating expenses year-to-date were $57.1 million for the first half compared with $27.3 million in the first half of last year.

This increase continues to reflect the investments we are making in accelerating the commercialization of our technology across multiple markets. Our number one asset at Solazyme is our team of innovative and dedicated employees. And while we continue to grow our team, we are also very closely managing our growth.

We ended the second quarter with 200 fulltime employees, compared to 186 at the end of Q1. Our net loss was $16.3 million for the quarter or $20.07 per share on a weighted average share account of $60.4 million, compared to a net loss of $10 million for the second quarter of 2011. Year-to-date our net loss was $29.1 million versus $15.6 million for the first half of 2011.

We ended the quarter with over $195 million of cash, cash equivalents and marketable securities, with net cash used in operations excluding changes in working capital, totaling approximately $14.2 million for the quarter.

Cash outflows for capital expenditures and repayment of debt principle for the quarter were approximately $4.3 million, driven primarily by planed investments in our Peoria facility.

As Jonathan mentioned, the investments in Peoria are already paying off with the successful commissioning of our integrated bio-refinery during the quarter. Peoria will enable us to continue meeting all of our deliverables against the active DOE program as well as providing commercial production for high value products and scale of capabilities for market development in fuels and chemicals.

As Jonathan mentioned, our Bunge joint venture is off to a strong start. The project is on track, and consistent with our previous guidance. We expect the plant to become operational in Q4 of 2013.

Given the importance of the JV, I thought it might be worthwhile to spend time reviewing the economics and how we expect to account for the JV.

Upon entering the joint venture, Bunge and Solazyme each committed to funding 50% of the capital requirements to build the first commercial unit, which will be owned by the joint venture and located at Bunge’s Moema Mill. The project is fully funded with commitments from both partners, were up to $72.5 million each.

In addition, we are working with the Brazilian development bank. And we continue to believe that we can secure debt financing for 60% or more of the cost of the facility. Assuming we secure this debt for the JV, the required capital commitment from Solazyme's balance sheet will end up being $20 million to $30 million for the overall project.

During the initial construction phase based on duel control of capital and operating investment decisions, we are not consolidating results of the joint venture. And as such, we currently account for the interest in the JV under the equity method of accounting.

We recognized $500,000 of equity net of losses for the three and six-month period, ended June 30th 2012, related to our investments in the Solazyme-Bunge joint venture.

And although, we are not currently consolidating the JV, we continue to believe we will consolidate the accountings of the JV prior to commencing commercial operation to the plant.

Looking forward to the remainder of the year, with the continued success of Algenist, we are on track to deliver product revenue in 2012 that more than doubles that of 2011. Until recently, we had also expected to build on the success of Green Strike and our other Navy programs to the award of new Department of Defense bio-fuel programs to be performed in the back half of this year.

However, current government fiscal conditions and the political climate make us increasingly cautious that we will be awarded additional near-term DOD contracts.

Entering the year, we have expected overall revenue to be up 25% to 30% over 2011. Based on our current view of prospects for near-term government contracts, we now expect our revenues to be up approximately 15% to 30% from 2011 or between $44 million and $50 million with the majority of this change impacting the third quarter.

As you know our business model is not dependent on government revenues or subsidies, and the current environment has no adverse bearing on our long-term business prospects.

In advance of bringing our larger commercial facilities online, we measure our progress against key commercial milestones, including progress on existing capacity programs at Peoria, Moema and Lestrem as well as new projects that we will bring online. We also expect to announce the expansion of existing partnerships and creation of new partnerships that advanced our technology platform.

And finally, look for us to broaden our downstream footprint as we add commercial up ticks tied to capacity, grow our skin and personal care business and build our nutritional businesses.

The second quarter was a great quarter for Solazyme where we exceeded our financial and commercial targets. With over $195 million in cash, all of our current projects are fully funded. And we are accelerating commercialization of our unique and valuable tailored oil technology.

We thank you for your interest in Solazyme. And I’d now like to turn the call over to the operator for Q&A. Operator.

Question-and-Answer Session


[Operator Instructions]. And our first question comes from the line of Brian Lee of Goldman Sachs. Your line is open, please go ahead.

Brian Lee – Goldman Sachs

Hi, guys. Thanks for taking the question. I had a couple. First, do you have any updates on your view for the timing in potential cost of the debt financing for the Bunge JV?

Tyler Painter

At this point we don’t have specific updates. We are working very closely with our partner Bunge, and are confident that we’re making progress and have very positive responses. We expect we’re working through. It’s typically a full year process with BNDS and we’re well into that process.

Brian Lee – Goldman Sachs

Okay. So I think –

Tyler Painter

From a cost of capital stand point, it would be a relatively low cost of debt within Brazil. You’re looking at probably mid-single digits kind of rates.

Brian Lee – Goldman Sachs

Okay. That’s helpful. So it’s till fair to assume it’s kind of late ‘12, early to mid ‘13, I think that’s what you had talked about in the past for the timing?

Tyler Painter

Yes. We’re certainly working hard towards that end.

Brian Lee – Goldman Sachs

Okay, great. And then a follow up if I may, any progress or visibility into a second commercial scale facility and on that, would you expect the partner for that plant to have economics, more keen to what you have with Roquette or with Bunge? Thanks.

Jonathan Wolfson

So, yes we’re working – I mean, there’s a pretty significant upstream team here, Brian working on additional capacity and we have quite a few irons in the fire.

What I would tell you is that you would expect late ‘12 or ‘13 announcements in this regard, it could be earlier. But there are a lot of companies that are in the process with us. I would say that I’d be pretty hesitant to be very specific about what the economics look like but we’re driving hard at having partners with large balance sheets and lower cost of capital putting in as much as possible.

Bunge as you know is shared while Roquette really is picking up all the capital and it’s obviously quicker to do to have relationship where the partners are putting in. The lower their percentage or the higher the percentage we’re putting in, the quicker the relationships are formed. That said I wouldn’t project with great specificity, but we expect partners will be leveraging their balance sheets with capacity with us moving forward.

Brian Lee – Goldman Sachs

Okay, thanks.


Thank you. [Operator Instructions] Our next question comes from the line of Ben Kallo from Robert W. Baird. You line is open, please go ahead.

Ben Kallo – Robert W. Baird & Co., Inc.

Hi. Thanks for taking my question. On the myristic acid in future products like that, how should we expect that to be delivered with to market? Should we expect that a partner to come to fund capacity there or will you deliver out of existing announcements like the Bunge plant?

Jonathan Wolfson

Ben, you’re asking a question that I think it has a really multiple part answer and it really depends on the type of upstream relationships that we’re forming for additional capacity beyond Bunge and Roquette.

As you can imagine, what rights go in to a particular partnership and what geographies and what oils are pretty critical questions for the company. And with that it would be impossible for me to give you a straight answer and say, "Well, every plant is going to be able to produce every oil because obviously there need to be areas where we can carve out special rights for partners in order to get them to put up significant amounts of capital.

So I would say there’s not a really simple answer, but the point is that the technology is an incredibly flexible technology. So whether you’re producing a myristic, an oleic, a lauric or any of these types of oils, you can produce them in the same fermentation and the same downstream and with the same feed stock and we’re leaving ourselves the flexibility to be able to put additional rights into partnerships moving forward.

Ben Kallo – Robert W. Baird & Co., Inc.

Great thank you. My follow up is on the FDA ruling, how should we think about that? Should we think about as accelerating Roquette, helping with that JV or is that outside of the JV where that would be helpful for new partnerships?

Jonathan Wolfson

That is directly within – that’s directly spot on within the soles of Roquette Nutritionals JV, so you should think about it as a very positive indication because it obviously allows us comfortably to be selling those oils in the US with the no questions notification from FDA.

But I would also say it has an impact on the broader soles on business particularly the soles on tailored oil platform because we’ve demonstrated that we’re able to take an algal oil through an FDA GRAS process and receive a note – questions notification.

So I think there’s a bigger implication but that particular notification is really directed to the soles on Roquette Nutritionals JV.


Thank you. Our next question comes from the line of Ed Westlake from Credit Suisse. Your line is open, please go ahead.

Ed Westlake – Credit Suisse

Good afternoon, Jonathan and Tyler. I’m just diving into details on CapEx yield again just maybe with Peoria, any thoughts on how the yields looked through the largest scale?

Jonathan Wolfson

I mean I guess the easiest thing to say is the same thing that Peter Licari, head of technology said in the last quarter. We’ve seen linear scaled up from small fermentation. We’ve seen linear scale up all the way through the large tanks of Peoria both yield productivity, volumetric productivity, the process is very scalable and robust process at scale.

And we’re thrilled. We’re able to produce oil that commercially yields in Peoria.

Ed Westlake – Credit Suisse

Okay great. And then on the CapEx, obviously breaking ground is great, but in term of any surprises in terms of how the CapEx program is, it’s probably early days is progressing there for the first bond?

Tyler Painter

Yes, no surprises at this point, Ed. I think we’re very pleased with the way the projects have gotten off to a start. And with Hildo managing the project coming in with his background and experience and working closely with Bunge, we remain confident to bring it in on time and on budget.

Ed Westlake – Credit Suisse

Right. And then on the myristic acid, say you got up to 50%, you’ve given us the price of how Peoria is trading, is it fair to look at some flower oil prices and think about that as the fair value of the other part, or is that some other thing that we should think about in terms of thinking about the ASP for that type of product theoretically?

Jonathan Wolfson

Ed, I don’t – I wouldn’t propose to give you a very specific profile for the remainder of the oils. I think that might be a reasonable follow-up thing for us to go back and look at. But I understand exactly where you’re going, but where we’re really focusing initially is we’ve been focusing on pushing the yields of myristic as high as we can.

It may be reasonable to – it may be reasonable to look at the rest as predominantly oleic, but I wouldn’t say that for sure right now. I think we’d have to get back to you on that.


Thank you. Our next question comes from the line of Lawrence Alexander of Jefferies. Your line is open, please go ahead.

Jim Fung – Jefferies & Co.

Hi, this is Jim Fung [ph]. I have two quick questions. Can you give an update on your view of Algenist and the performance of the business line as you look into the back half of the year in 2013 where you treat these new products and continued potential growth?

Jonathan Wolfson

Algenist is off to – I mean Algenist is off to a roaring start we think. The first half of this year was better than all of last year. We are continuing to make real progress. We continue to see additional growth.

But I think where we look at it this year is we launched a new product line at the beginning of the year and obviously along with the launch of a new product line comes new channel filling.

So what we’re e really looking at from our perspective for the balance of this year is the same target that we set up a year with which is we believe will more than double last year’s revenue.

So I think that that’s really the best perspective I can give you on the quantitative performance of the brand and we’re not going to be providing guidance at this point on ‘13.

But what I’ll say to you from a qualitative perspective is that we’re very bullish for the long-term value creation of the brand because what we’re seeing is we’re seeing really good response in customer loyalty and repurchase.

And it’s actually pretty easy for people evaluating the strength of Algenist to do that. I mean you don’t have to go that much further than going to and reading some of the reviews on the website to see how customers feel about the products.

Jim Fung – Jefferies & Co.

And how are the interest level have been in your products that you’ve introduced like the no [inaudible] Algalin Flour and others that you’ve introduced earlier this year?

Jonathan Wolfson

I mean are you – just to be clear well the Almagine HL, the High Lipid Algalin Flour that’s part of Solazyme Roquette Nutritionals is a very warm reception because it’s a really unique material that replaces eggs oil and butter in baking and dairy and a variety of applications. And there’s a lot of interest in the market in incorporating that.

I mean at this point the only thing that we have running there is the 300 metric ton Phase I facility in Lestrem which is now divided between a number of different product lines. So I think supply is obviously a significant issue with respect to market seeding and which is why we’re working to bring a Phase II plant on line in the middle of next year.


Thank you. Our next question comes from the line of Smitti Srethapramote from Morgan Stanly. Your line is open, please go ahead.

Smitti Srethapramote – Morgan Stanley

Hi, Jonathan and Tyler. Can you talk about the significance of Soladiesel being granted for registration as a fuel by the EPA? And have you received any increased level of value increase post this announcement?

Jonathan Wolfson

Yes, we have. We also now – Smitti, we’re happy that even though we announced, for instance even though we announced the partnership with VW a little while back not only a few months ago, but we now have a number of brand new VWs at Solazyme that are being run full time on the fuel for a testing program with Volkswagen’s engineering and sustainability groups. And they were thrilled also with respect to the EPA registration.

What is it does, and you know, it opens up the ability to sell the fuel in all kinds of variations from completely unblended, all the way through very significant blend percentages which is important for us because as you know, the way that we intend to enter the fuels market will be on the higher value blend side in fuels.

And so having the EPA certification, as broad as it came in, which allows us to go all the way to 100% neat and all the way down to blends was really important for us, and something that we’re really happy about.

But obviously, we need to have the large scale capacity to be delivering those blends stock fuels into the market, so that’s a lot of what we’re focusing on now.

Smitti Srethapramote – Morgan Stanley

Great. And maybe just one quick follow up on the guidance for 2012, the original guidance for revenues would be 25% higher in 2012 than 2011, and now the new guidance is somewhere between 15% and 30%.

So there’s still a chance that the revenues could still be higher than the previous revenue guidance. Can you talk about where potential upside could come from?

Jonathan Wolfson

I mean I would – I think upside can come from a number of areas. It can come from – you can assume that in any given time, we’re working on a significant number of collaborations.

And the thing is, these collaborations are often multi-year affairs, but sometimes, when they break, they break – when they break positively, they break positively quickly, and those are the kinds of things that can really change the picture.

I guess the comment I’d make though there, Smitti, is just that we came into the year with a lot of really good work with the Department of Defense, in particular the Navy under our belts. And going into a really successful green strike, we expect it to come out in the back half of the year with a series of programs that we would be performing in the back half of the year.

And the climate, the fiscal, and political climate has shifted quite a bit. And that has made us re-evaluate which is one of the reasons that we’re adjusting the downward side of the range.

Look, we’re driving toward all the same things, but we’re also trying to be candid about what we view as the possibilities when we look out toward government programs which were a significant part of our revenue for the back half of the year.


Thank you. Our next question comes from the line of Colin Rusch from ThinkEquity. Your line is open, please go ahead.

Noah Kaye – ThinkEquity

Hey, gentlemen, it’s Noah in for Colin. And congratulations on the strong execution in the quarter.

A question for you about gross margins on products, it looks like they picked up nicely. I’m trying to understand how much of that is a function of integrating your operations versus just higher volume utilization?

And also, is there a way to express how much product was actually sold in terms of metric tons or liters, some way to get to an average AFP?

Tyler Painter

Yes, hi Noah, this is Tyler. In regards to the product revenue, you’re really looking at current levels that’s all related to our skin and personal care line with Algenist.

There are different distribution channels we work with in terms of through Sephora and also through QVC, and these do have some impacts on the margins.

What we’ve stated previously is that we target for the margins to remain between 60% and 80%. We’ve been running in the high 60% to date, up to 70% and we expect that’ll continue in those levels.

Noah Kaye – ThinkEquity

Okay, great. And just a question about the high oleic, as we think about commercializing this on a large quantity of scale, how would you compare the amount of downstream processing in a sort of non-interest solid [ph] processing that you have to do? Is this a relatively drop in product for you?

Jonathan Wolfson

Well I guess what I would just refer to, and again, you have two of the less technical people on the phone here, just to be fair, but what you are looking at in the OS [ph] side, or the oil stability index data that we shared earlier, you’re looking at a very simple adjustment which is the addition of a natural anti-oxidant and in a package which is very, very standard.

And that is, to the extent that we’re responsible for delivering oil into a market that’s being used as a functional fluid. That may be as much as we’re responsible for doing from a downstream processing perspective.

And I will just quickly call your attention to the difference between applications where the oils are being used. And now we’re talking about industrial, just to clarify, the difference between applications where the oil is being used as a functional fluid, and those are applications where you’re actually using the whole triglyceride oil as is going into it can be a metal working fluid, a heat transfer fluid, a transformer fluid, a motor oil, or any of these kinds of things.

And in those oils, there may be significant work that’s done, but very often, a lot of that work is really blending an additive package adding, so not necessarily capital heavy. And also not likely to be the kind of work that Solazyme would include at the oil production site.

On the flip side, you have oleochemicals in which the fatty acids are often being broken off of the backbone, off of the glycerol backbone and being converted into serfact [ph] instead of wide variety of other materials.

And those have a tendency to be significantly more CapEx heavy, but again, what we’re really delivering initially into those markets is we’re delivering the triglyceride oils which are then going through additional downstream processing.


Thank you. Our next question comes from the line of Mahavir Sanghavi from UBS. Your line is open, please go ahead.

Mahavir Sanghavi – UBS

Hi Jonathan and Tyler, thanks for taking my question. This first question – thanks for the update on the high oleic acid polyunsaturated profile, just a question on that in terms of the pricing, how should we think about premium on that compared to traditional, just vegetable oil?

And the second one is, could you give us a number of customers that you’re talking to on that front? And is that something that we should expect in the near term as a new update on the customer side?

Jonathan Wolfson

So I guess I’ll start with the second question first, and I’d say, we’re certainly working with a number of customers on this oil right now, well let’s call them potential customers, and looking at where they would need the oil geographically and how it would be produced for them.

So there are certainly a number of customers, and I would expect that at some point, when we’re ready, and we have something really relevant to report, we’ll do that as an update on the commercial prospects for the oil.

As a way to think about the economics, I guess the easiest way to look at it, is to say that the value that we can accrue above the closest proxy oil which in this case would be a high oleic sunflower, it would be a very high oleic sunflower, so I think what you guys can do there, is you can go do your own investigation on the value of high oleic sunflower oils which are well above $2,000 a ton.

And then the additional value we create, will depend on the application. And you can think about it very simply. I mean I can give you the way that a lot of these oils are actually priced. When you think about it, think about it from a food perspective.

Let’s say you were using it as a frying oil, if you can reduce the number of turns of frying oil in that commercial fryer by how many turns per month, you can start to determine how much extra value you’re adding, and then that value needs to be shared between the producer and the customer. That’s one example. Another would be, if you’re producing an oil that’s going to be used in a particular heat transfer application, and you’re looking at how often that oil would need to be replaced, or the remediation cost if that oil was a mineral oil and there was a leak, and there’s actuarial data on that kind of thing, also depending on the application.

So it’s not a really simple answer expect to say, to some extent, it’s application specific, and the premium will be based on whether or not we do things to enhance, whether for instance we decide to add, work with people to add additive packages for specific applications, and that’s the kind of work that we look at to figure out how we’re going to capture additional value for the greatly enhanced properties of the oils.

So I won’t give you a straight number, but I’ll tell you, just looking at the oxidative stability index numbers, those are huge differences over the best oils that are already out there in the market.

Mahavir Sanghavi – UBS



Thank you. Our next question comes from the line of Sanjay Shrestha from Lazard Capital. Your line is open, please go ahead.

Sanjay Shrestha – Lazard Capital

Thank you. Good afternoon guys. First off, congratulations on all these new oils. So Jonathan, I hate to do this, you’ve talked about this a lot, but I have a few follow up question on that. So you guys are sort of doing something that hasn’t kind of been done before, right, in terms of coming up with all these new oils.

So how are you thinking about sort of a near term addressable market opportunity and the long term addressable market opportunity and kind of a partnership that you would think is ideal to really get the best value out of this product.

Jonathan Wolfson

It’s a hard question, but I’ll give you a disappointing answer to start out with, Sanjay, which is that, it really is very much a work in progress right now. If I told you that we really have the answers to figure out exactly how to generate the highest level of value for each of these oils, I would be stretching the truth a bit.

The more we talk to customers and the more we understand the pain points, the more we get a perspective on, really, what the value creation is for these. I mean, some of it is much easier, okay? Like if you’re going to fractionate off a myristic acid off of a triglyceride oil and you’re going to sell the myristic acid, the other acids, and the glycerol, you can do the math pretty easily. It’s a one-minute Excel spreadsheet exercise to determine how much value you’re creating.

On the flipside, where you’re producing specific structuring fats for nutrition or functional fluids that have different properties and even blend stocks, the value creation it really varies a lot from application to application. And this is very much a work in progress to figure out how indeed we’re going to capture the highest levels of value.

I wish I could give you a more refined answer, but a lot of what we’re concentrating on is determining the most simplistic level of understanding value first so we can direct the R&D guys to making the oils that we know are going to generate good returns. But as a practical matter, there’s a lot of refinement that goes on after that to determine how to market and sell.

Sanjay Shrestha – Lazard Capital

Okay. So in sense, actually, in the commercial revenue out of this new oil, right? So then we’re sort of thinking ‘14 and ‘15 kind of a timeframe and in ‘13 the fund that comes up, it’s going to focus on sort of the near-term chemicals market and things along those lines. Is that fair when you think about it?

Jonathan Wolfson

I think I got the question. It was a little foggy, but not from you, from our connection here. But I think you asked if we’re really – if the focus for a lot of these things is really more driven on the chemical side of the world and in the nearer term. And the answer to that is yes. And part of the reason for that is because it’s the most easily identifiable significant margin creation place we can operate in.

I mean, ultimately, I think, although we’re incredibly bullish on the opportunities for Solazyme Roquette Nutritionals, I think tailored food oil provides enormous opportunity particularly when you look at the value of structured fats and oils in a variety of applications. But as you rightly understand, that requires regulatory process and that requires some period of time.

So the very first applications, the larger applications are really going to be on the chemical side, shifting into nutrition and fuel blend oils is probably the way that we think it will sequence most likely.


Thank you. Our next question comes from the line of John Quealy from Canaccord Genuity. Your line is open. Please go ahead.

John Quealy – Canaccord Genuity

Hi. Good afternoon, guys. Just two questions, first on Almagine. Could you give us a range of when you think testing will be done by the food companies? And also, the track of commercialization for that, will it differ significantly from Algenist? And then, secondly, just in terms of the guidance. You didn’t talk about previous OpEx expectations if we should still work off those. Thanks, guys.

Jonathan Wolfson

So I’m going to let Tyler answer the second question. And with respect to the first question, it is a bit different in terms of the adoption cycle. And main reason is because this is really what you’d call a B2B model where what we’re doing is we’re selling an ingredient that’s going to the food companies who are incorporating it into products that are then going out into the market. And I think our perspective is that we’ll have the Phase II plant coming up in mid ‘13, which will provide the ability to do large sampling and market seeding and commercial sales. And that’s what you’d call the jumping off point and you start to see real traction thereafter.

Tyler Painter

Yes. And then, John, in regards to the question on the OpEx side, we do expect – we had guided previously to a $110 million OpEx for the year. We continue to have that as a target, actually expect that we’ll probably bring that down slightly in the back half so that you’d see it coming slightly below that. On the CapEx side, we had guided $25 million to $50 million with a real expectation that it would likely come into the middle of that range at $35 million. And at this point, we continue to expect that it’s likely approximately $35 million.


Thank you. Our next question comes from the line of Weston Twigg at Pacific Crest. Your line is open. Please go ahead.

Weston Twigg – Pacific Crest

Good. Thanks for taking my question. Just real quickly on the Bunge plan when it becomes operational in Q4 next year. You previously indicated that it will ramp all at once more or less, not in stages. And so I’m just wondering if you expect actually cheap revenue that quarter and then have it fully running for all of Q1. And then I’m just also wondering how sugarcane season ties into that.

Jonathan Wolfson

So, Wes, I think, I guess the simplest way to put it is, our goal is to drive revenue from that plant so as a practical matter and to do it when the plan comes online. So that certainly is a goal for the end of 2013 to be generating revenue out of that plant. And just to be clear that there are plenty of things that we’ve done from a technology standpoint that allow us to get that plant running when it comes up regardless of some of the cycles of cane planting season.

Now, I’m not going to give a lot more detail on that, except to say, obviously, when you build these plants, you want to optimize return on invested capital, and so you want them to be able to run as many days as you can. And that was important for us in the design of the plant. That’s probably the most important point.

The other point which – I think what we’ve said is, we’re going to bring that plant up as quickly as we can, which is exactly what we’re going to do. I mean, I don’t know of any industrial biotechnology production plant that’s ever come up at 100% nameplate capacity immediately out of the gate. Our goal is to bring it up as rapidly as possible. That’s traditionally a 12- to 24-month process.

The goal is when we bring it up to get it running at as a high capacity as we can out of the gate. If I ever did say that we would bring it up at full capacity at once, I was mistaken. Industrial biotech plants really never come up at a 100% of nameplate capacity right out of the gate. But they can get up there pretty quick the harder you drive, and that’s certainly something that we’ll be pushing for.


Thank you. Our next question comes from the line of Pavel Molchanov from Raymond James. Your line is open. Please go ahead.

Pavel Molchanov – Raymond James

Guys, thanks for taking my question. Back to I think the previous question about the scale up or the ramp up at Moema, 12 to 24 months after Q4 of 2013, just to be clear, that’s your expectation for hitting nameplate capacity 100,000 tons a year?

Jonathan Wolfson

I mean, that’s generally the timeline, I would say, these kinds of plants get to 100% of nameplate. We try to deal with everything, I mean, we ended bringing up fermentation operations in Peoria in the fourth quarter of last year and we bought the plant in – I believe we closed on the plant in May. So I think there’s a lot that you can do if it’s a very concerted effort on the part of the team.

And so, what I would say is, we’ll drive toward nameplate as absolutely quickly as possible. When I gave that range, I’d say that’s a pretty standard range to get to nameplate.

Pavel Molchanov – Raymond James


Jonathan Wolfson

Although you can come online at a reasonably high percentage. What you end up doing is you’re ending up working out bugs and kinks in the plant always to make sure that it’s running as effectively as possible. And that does take some time.

Pavel Molchanov – Raymond James

Understood. And then anything new on Quanta’s front?

Jonathan Wolfson

No, we don’t have anything specific to report on the Quanta’s front. I would say we’re probably the hotter relationship in terms of the aviation side. On the commercial aviation side, it would be United for Solazyme right now, and there’s a lot of work that the companies are doing together there.

Pavel Molchanov – Raymond James

Okay. Appreciate it, guys.


Thank you. Our next question comes from the line of Michael Klein from Sidoti & Company. Your line is open. Please go ahead.

Michael Klein – Sidoti & Company

Hi, guys. I’m curious on the time it takes to develop the oils and when they become commercial available. So far, you’ve talked about dielectric oils at Moema, and that’s something you’ve been talking about for awhile. So with some of these newer oils, when can they be commercially available?

Jonathan Wolfson

Yes, it’s a good question, and it has a lot to do with how different the profile is from an oil that we already have that’s running at a good yield and productivity. And so the answer is, it can be a few months if it’s a profile that’s not that different, up to a year to two years if it is a very significantly different profile.

There’s a period of time it takes to actually get to the profile and, again, that period of time can be very quick or it can take a little longer depending on – it can take as little a month if it’s something that’s relatively close a profile we already have or it can take significantly longer close to a year if it’s a profile that we – that’s not that like things we’ve done before. And once you have the profile, there is work you have to do to optimize the strength to make sure it’s running yield and productivity.

Michael Klein – Sidoti & Company

And with the uncertainty with the government sponsorship and whatnot in the near term that you talked about, what does that mean for current R&D and the timing of commercialization for maybe fuels applications?

Jonathan Wolfson

It doesn’t have much to do with either really – I mean, its help. It certainly helps us. It allows us to continue running to do more runs at scale, it allows us to continue looking at which oils are really going to produce the best fuels with the refining partners. So it really is a benefit to continue doing work in the near term with DOD and the Navy. So I would say that the reverse of not doing as much work certainly leaves something to be desired.

But from a commercialization timeline perspective it doesn’t really have much of an effect because what we’re really looking at doing on the commercialization side also are – the first oils on the commercialization timeline are really going to be blend stocks where we’re creating significant value.

Tyler Painter

And I’d only add, if you look at the overall program revenue and the program expenses that associate those. If we come in at the lower end of the range on a revenue, you’d also expect you’ll probably see R&D expenses be slightly lower than you saw on Q2 that we saw peak in the quarter.


Thank you. That does conclude our Q&A session for today’s conference. I’d like to turn the call back over to Jonathan Wolfson for any closing remarks.

Jonathan Wolfson

Well, we really appreciate everybody taking the time and getting on the phone. We also really appreciate people following the company, asking good questions. We’re driving it hard; we’re creating a lot of value every day. New oils, new potential partners, new partners coming up, downstream off take agreements, lot of good stuff in the future, and we look forward to being broadly commercial in every single market in the near term.

Thanks a lot.


Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may disconnect. Have a great rest of the day.

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